IMF slams Ukraine's macroeconomic policy
The International Monetary Fund (IMF) has said that despite the Ukrainian authorities' efforts to maintain macroeconomic stability, the Ukrainian government's policy mix has generated large external and fiscal imbalances and has contributed to deepening the recession in the country.
While summarizing an annual analysis of the Ukrainian economy, the fund's executive director recommended the Ukrainian authorities implement a package of comprehensive policy adjustments in several areas, including curtailing the fiscal and external current account deficits, phasing out energy subsidies (that reached about 7.5% of GDP in 2012), strengthening the banking sector, and improving the external competitiveness of the economy.
The IMF expects Ukraine's real GDP to shrink by 0.3% this year and grow by only 1% in 2014.
Directors said that the overvalued exchange rate has contributed to a widening external current deficit, loss of competitiveness, and steady depletion of international reserves. At the same time, a tight monetary policy, focused on defending exchange rate stability and based on the extensive use of administrative controls, has stifled economic growth.
Against this background, IMF executive directors advised the authorities to allow greater exchange rate flexibility and to accelerate the transition to an inflation targeting framework.
Directors welcomed the reported positive developments in the banking sector. Banks' exposure to foreign exchange risk has declined and bank capitalization and provisioning have risen, providing a cushion against risks stemming from high non-performing loans. The IMF recommended the authorities enforce consolidated supervision and high reporting standards, proceed with independent audits of vulnerable banks, and develop contingency plans to support banks in case of need.
The IMF stressed the importance of fiscal consolidation for the overall adjustment effort. High budget expenditure should be reduced by rationalizing public procurement, restraining the growth in public sector wages and employment, and limiting pension indexation to inflation
Directors also underscored the need for a comprehensive energy sector reform. They stressed that upfront, meaningful, and broad-based tariff increases are essential for reducing large quasi-fiscal losses, attracting new investments, and improving governance.
Ukraine's balance of payments deficit this year will exceed 8% of GDP and will remain at the same level in 2014, according to IMF experts. The country's budget deficit, along with Naftogaz Ukrainy's losses, will reach 7.7% of GDP this year and 6.6% of GDP next year.
Ukraine received loans from the IMF in 2010, but only partially implemented the agreements reached with the fund, and in this connection the program has not been implemented.